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Monthly Archives: April 2018

It’s official: The U.S. leveraged loan market is a $1 trillion asset class.

As of April 27, the amount of outstanding institutional credits underlying the S&P/LSTA Index topped that milestone, after growing uninterrupted every year since hitting a post-crisis low of $497 billion in 2010. It has since doubled to its current size.

Another milestone: The loan market comprises more than 1,000 issuers (1,025 to be exact), up 56% from the 658 at the end of 2010.

These two headline numbers are only the latest highlights for a market that has been running at breakneck speed over the last two years.

In 2017 the U.S. loan market printed a record $503 billion of institutional loans, exceeding by 10% the prior high of $455 billion in 2013, according to LCD. While last year’s super-charged conditions contributed to the growth of the Index, however, they did not push it across the $1 trillion mark because 48% of 2017 issuance backed refinancings and recaps. On a net basis, the Index grew by $75 billion last year, roughly half of the $131 billion expansion in 2013.

The growth in the U.S. leveraged loan market over the past few years has coincided with increased interest in the asset class from retail investors into loan mutual funds/ETFs, and via the formation of collateralized obligation vehicles (CLOs), which buy portions of large corporate loans.

One reason for the increased enthusiasm from investors is interest rate hikes by the Fed. Floating-rate assets, such as loans, tend to fare better in a rising-rate environment than do fixed-rate assets, such as high yield bonds.

CLO issuance in 2017 totaled $118 billion, easily outstripping projections made at the start of the year and nearing the record $124 billion in 2014, according to LCD. And CLO investors have only picked up the pace this year; so far in 2018 there has been $40.3 billion of new CLOs issued, compared to $25.2 billion during the same period in 2017. – Staff reports

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

Over the last 12 months, the European leveraged loan market has undergone a growth spurt, which expanded the size of the S&P European Leveraged Loan Index (ELLI) by 24%, to a record-setting €150 billion.

However, it was the borrowers at the riskier end of the credit-quality spectrum that drove this growth.

In the 12 months through March 31, the size of the single-B rated market grew by €30.5 billion—a 38% increase in total par amount—while the size of the better-quality, BB rated sub-index contracted by €3 billion (a 9% decrease).

Of course, the lower-rated names have always dominated the European loan market, and their par amount outstanding outweighs that of the higher-rated cohort by over four times, at €111 billion to €26.2 billion, respectively. However, in 2017 both sub-indices expanded in size on a trailing-12-month basis. This year, their paths have diverged, with the riskier issuers gobbling up market share. – David Cox/Marina Lukatsky

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

High yield debt backing PetSmart declined Thursday after the privately held issuer again rolled out underwhelming quarterly results.

For its fiscal fourth quarter, sources said PetSmart on Wednesday booked adjusted EBITDA of roughly $203 million on revenue of about $2.5 billion. One buysider noted that while the adjusted EBITDA performance for the period fell shy of Street expectations, earnings overall were buoyed by improved sales at Chewy.com.

PetSmart 5.875% first-lien notes due 2025 and 8.875% senior notes due 2025—both of which priced at par in May as part of a $2 billion offering backing the roughly $3.4 billion purchase of Chewy.com—fell by 2.75 points and 0.75 points, respectively, according to MarketAxess, to 70.5 and 56.25. The issuer’s 7.125% notes due 2023 lost 2.5 points, to 55.

Meanwhile, the issuer’s B term loan due March 2022 (L+300, 1% LIBOR floor) fell to quotes of 77.25–78.125, sources noted, indicating a decline on the day of roughly 2.5 points from Tuesday’s levels.

The company’s Chewy.com bonds first slipped into distressed territory in December on the heels of lackluster third-quarter results and a ratings downgrade by S&P Global Ratings. PetSmart reported third-quarter adjusted EBITDA of roughly $189 million in December, a performance that was also shy of expectations, according to sources. S&P Global Ratings on Dec. 19 lowered the issuer’s secured and unsecured bond ratings to CCC+ and CCC–, respectively, from B and CCC+, while maintaining a negative outlook.

PetSmart notes also tumbled in March on news of the departure of Ryan Cohen, the co-founder and CEO of Chewy.com, and again earlier this month in response to relatively weak comparable-store sales and a 15% quarterly decline in EBITDA at industry peer PetCo Holdings. — James Passeri

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

Driven by an uptick in European M&A activity, private equity shops are tapping strong demand from investors for second-lien loans and high yield bonds, both of which sit behind first-lien term debt in a deal’s capital structure.

Specifically, by the end of 2018’s first quarter, 58.5% of European private equity borrowers raised all of a deal’s financing solely in the senior loan market, according to LCD. That’s the lowest post-crisis (2008-09) share since 2014, and is down from a post-crisis peak of 77.5% in 2016.

Looking more closely at the subordinated debt: At €24.8 billion, 2017 hosted the second-highest annual total (after 2013) for sponsor-driven bond issuance since LCD began tracking this data in 2006. And second-lien has made a resurgence recently — albeit mostly in pre-placed form with direct lenders, as opposed to more broadly syndicated second-lien. According to data collected by LCD on the middle-market in Europe, second lien pre-placed with direct lenders reached €2.4 billion in 2017, up from €745 million in 2016. – Taron Wade

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

WeWork has completed its first-ever bond print—$702 million of seven-year notes—at the mid-point of price guidance, sources said. J.P. Morgan was lead bookrunner for the bullet paper, which was upsized amid investor demand from $500 million. Proceeds will be used for general corporate purposes. The New York–based company provides workspaces, community, and services for customers that range from entrepreneurs, freelancers, startups, artists, small businesses, and divisions of large corporations. In an April 24 report, analysts at S&P Global Ratings said the B corporate rating assigned to WeWork reflects the borrower’s “substantial growth investments and resulting negative cash flow, duration mismatch between its long term lease obligations and short term member contracts, exposure to an entrepreneurial workforce vulnerable to economic cycles, and participation in a relatively early stage, highly competitive, and low-barrier-to-entry market.” The rating agency added that these risks, however, are partially offset by WeWork’s large cash position, positive working capital, technological capabilities, operational and cost efficiencies, solid position in developed markets, growing scale within the co-working space and associated network benefits. Moody’s and Fitch have assigned B3/BB– corporate ratings to WeWork. – Jakema Lewis

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

WeWork is circulating talk for its debut offering of $500 million of seven-year (non-call life) notes at 7.75–8.00%, aligning with early market whispers, sources said. Books will close tomorrow, April 25 at 1 p.m. EDT.

Proceeds of the 144A/Reg S-for-life bonds will be used for general corporate purposes.

New York–based WeWork provides workspaces, community, and services for customers that range from entrepreneurs, freelancers, startups, artists, small businesses, and divisions of large corporations.

Analysts at S&P Global Ratings have assigned B+ and 2 recovery ratings to the deal, as well as a B corporate rating. S&P Global Ratings has a stable outlook for the issuer.

Fitch today assigned a BB– issuer rating to WeWork and the proposed unsecured issue, with a stable outlook. In its report, the rating agency noted the company’s existing debt includes a $650 million revolving credit facility and $500 million letter of credit reimbursement facility, which matures on Nov. 12, 2020. — Jakema Lewis

LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

It was a busy week in the U.S. leveraged loan market, with new-issue activity totaling $20.5 billion, according to LCD.

While that’s a hefty figure, $5 billion of that amount is in the form of a revolving credit – as opposed to a more richly-priced institutional term loan – part of a debt package backing the merger of the Albertsons supermarket group with the Rite Aid pharmacy chain.

Year to date, U.S. leveraged loan volume totals $207 billion, $154 billion of which are institutional term loans. – Staff reports

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

Netflix (Nasdaq: NFLX) has placed $1.9 billion of 10.5-year bullet notes at the mid-point of guidance, sources said. Joint bookrunners for the deal, which was completed with a $400 million upsize and serves as the borrower’s largest bond print, were Morgan Stanley, Goldman Sachs, J.P. Morgan, Deutsche Bank, and Wells Fargo. All proceeds will be used for general corporate purposes. Today’s tap comes shortly after the streaming services powerhouse on April 11 scored one-notch corporate and unsecured ratings upgrades to Ba3 from Moody’s, on expectations for continued strong momentum of global subscriber and revenue growth for the intermediate-term, and that 2018 will be the negative cash flow trough for the company.

Meanwhile, analysts at S&P Global Ratings today said that “pro forma for the debt issuance, the company’s adjusted leverage will remain about 4.1x (as of March 31, 2018),” and that it expects the company’s adjusted leverage to increase slightly to the low- to mid-4x area as it continues to rely on debt issuance to invest heavily in content in 2018. Netflix had last accessed the market in October 2017, when it placed $1.6 billion of 4.875% notes due 2028. – Jakema Lewis

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

In this month’s Capital Markets View video, LCD’s Taron Wade and S&P Global’s Chris Porter do their first quarterly comparison of the U.S. and European markets. (This will be an ongoing quarterly feature of the video.)

Discussed this month:

The first quarter of 2018 was a strong one for loan volume in Europe, matching the 1Q17 tally, though the U.S. supply was down a little from last year’s record effort.

The long-promised uptick in M&A volume has finally arrived, driven in part by activist investors pushing for corporate disposals.

European repricing volume was lower in the first quarter than in 4Q17, though such supply remains strong in the U.S. This can be explained by divergence between the regions’ interest-rate environments.

On a rolling three-month measure, the all-in yield to maturity (for TLBs rated B) was much higher in the U.S. than in Europe, at 5.66% versus 4.17%, respectively.

Weighted average spreads are closer between the two regions, though they’ve headed up in Europe and down in the U.S., which helps explain the repricing dynamic (see above).

There is also divergence in some credit metrics, with the total-debt-to-EBITDA multiple slightly higher in Europe than it is stateside, while the former region also hosted less senior debt as a share of overall volume in 1Q18 than previous periods.

Total cross-border volume was higher in 1Q18 than the year-ago period, despite such supply hitting a record in 2017.

The CLO market enjoyed a very strong first quarter on both sides of the pond, supported by strong demand, and could see some new managers emerge this year.

The URL for the video: https://www.spratings.com/en_US/video/-/render/video-detail/capital-markets-view-april-2018

Taron Wade heads up LCD’s European Research efforts. Chris Porter is Head of Loan Recovery & CLO Business Development, S&P Global.

As ever, please feel free to contact Taron or Chris if you’d like a particular topic discussed in next month’s video.

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.

Cleveland-Cliffs (NYSE: CLF) tipped on Friday that it is mulling a special dividend to shareholders, as part of the iron-ore mining company’s broader strategy to return capital to long-term investors after reporting improved EBITDA in the company’s principal U.S. iron-ore segment, alongside a bullish outlook from CEO C. Lourenco Goncalves.

Goncalves said on the company’s morning earnings call with analysts that the issuer’s roughly $300 million in 2020 and 2021 bond maturities will be addressed “at the right time,” allowing Cleveland-Cliffs in the meantime to utilize its enhanced liquidity profile for shareholder returns. Goncalves said that a special dividend would be a means to “celebrate the beginning of the process and then initiating an ongoing dividend that will grow over time.”

The issuer’s 4.875% secured notes due 2024 added about a quarter of a point in midday trading, to 98.5, according to MarketAxess. Meanwhile, Cleveland-Cliffs shares (NYSE:CLF) climbed roughly 11%, to midafternoon levels of $7.98.

The company reported first-quarter revenue of $239 million and an operating income of roughly $34.7 million, which topped analyst forecasts by 34.3% and 57.6%, respectively, according to consensus data compiled by S&P Global Market Intelligence.

“The year started very well for our pellet business, with better-than-expected performance for both tonnage shipped and price realization,” Goncalves noted in a Friday statement, highlighting adjusted EBITDA in the U.S. iron ore segment of $77.1 million for the quarter, versus $64.1 million year-over-year. “The Great Lakes ice melting earlier than forecasted has helped our blast furnace clients to start a much needed replenishing of their depleted pellet inventories ahead of their own expectations,” he added. “To illustrate its strength thus far, we outperformed our EBITDA from last year’s first quarter in U.S. Iron Ore, despite only recording about half the sales volumes.”

The company in December inked a $400 million offering of 4.875% secured notes due 2024, which—along with the issuance of $316.3 million of 1.5% convertible senior notes due 2025—backed Cleveland Cliffs’ hot briquetted iron (HBI) capital project, and general corporate purposes. Rhetorically addressing questions of why the company would issue debt when strong cash flow would address the needs, Goncalves emphasized that it garnered “very cheap” costs, and said “we had a transaction that was extremely positive for us under any circumstances.” He added that the influx of liquidity has prompted management “to start thinking about returning capital to shareholders,” a pecking order on which Goncalves says he sits at number 10, below more senior institutional stakeholders.

As reported, Cleveland-Cliffs bonds were previously buoyed in January, on the heels of better-than-expected fourth-quarter results, as adjusted EBITDA of $129.2 million topped analyst forecasts by 17.2%. The issuer’s 4.875% senior notes due 2024 have declined moderately from January highs of 100.75, to 98.5 in Friday trading, according to MarketAxess.

Cleveland Cliffs’ corporate ratings are B/B2, and senior and unsecured bond ratings are BB–/Ba3 and B/Caa1, respectively, with a negative outlook by S&P Global Ratings and stable outlook from Moody’s. — James Passeri

LCD comps is an offering ofS&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCDhere.